The Free Market 14, no. 11 (November 1996)
It's a myth that the Federal Reserve is independent of politics. It's a lie so brazen, in fact, that it's fit only for Fed press releases. Every administration, to take just one example, tries to get the Fed chairman to time monetary policy so as to insure its reelection.
Fed chairmen will play along, provided that's consistent with the interests of the largest bankers, but not always with success. As economist Roger Garrison pointed out at the Mises Institute's conference on "The Case Against the Fed," presidents know they must seek the Fed's favor. And Clinton has sought it with a passion, meeting Alan Greenspan every Tuesday morning for breakfast. Not all presidents are as savvy, however.
Three presidents in the post-war period did not play the Fed game properly. Carter's loose-money policies came too soon before the election, and ignited a fierce inflation. Bush's came too late, failing to boom the economy in time for the election. Ford didn't know he was supposed to badger the Fed for lower interest rates, and so didn't do anything. All three cases have this in common: the incumbent lost.
Rarely has the Fed's timing been better than in this election season. Early in Clinton's term, Greenspan allowed Clinton to take credit for the economic recovery of late 1992. Then Greenspan rested on his laurels, and played a few reckless monetary games—such as engineering the bailout of Mexico, and the bailout of the bailout of Mexico—and even allowed the economy to slump in 1994.
This year, Greenspan has been Clinton's most valuable friend. On the eve of Greenspan's reappointment in January 1996, Clinton urged him to lower interest rates. Greenspan complied, got reappointed, and kept them low for ten months. The result was a flurry of "good" economic news in the three months prior to the election. I use quote marks because it's not real, but only a printing-press recovery, and cannot be sustained.
Greenspan complied over the protests of eight of the twelve regional Fed banks, which are not necessarily staffed and managed by Democrats. In late September, it appears, these people became alarmed that Greenspan had become such a willing tool of the Clinton administration. They protested, and demanded an increase in rates to quell a developing inflation threat.
Someone from the Fed regional banks leaked the fact of their protest to the press, the most serious leak in anyone's memory. Greenspan not only called in the FBI to investigate it, and threatened the source with prosecution, he defied the protest by refusing to raise rates in the next meeting of the open market committee. The New York Times praised Greenspan for asserting his independence from the regional banks. But what about independence from government?
Truly hilarious are the various excuses given for Greenspan's behavior. Turning the point on its head, National Public Radio said it showed that Greenspan was refusing to intervene in the elections. The Times, famous for its reactionary attachment to Keynesian theory, said Greenspan was convinced that growth was not strong enough to start inflation.
These excuses merely cover the fact that Clinton owes his reelection to the central bank, which was probably in the cards as far back as 1992. At Clinton's first state of the union address, Greenspan took a seat between Hillary Clinton and Tipper Gore, and they chatted like old friends. He was signaling to those in the know that he was a team player.
It's mind-boggling. The Fed chairman is the most powerful manipulator of American political life, far more powerful than voters or even the financial benefactors of the two parties. It is he who directs the short-term state of the economy at election time, and thereby what issues are discussed, how the president is perceived by voters, and therefore who is going to rule us for the next four years.
What Greenspan has done this year is an awesome political accomplishment. He caused the same people who tell pollsters of their hatred of government to vote for a man who tried to finish socializing medicine, who raised their taxes, who stepped up regulation of the economy, and who expanded the domestic spy apparatus.
The Fed s actions are a frightening exercise of power, totally inconsistent with the free market and a republican form of government. The whims of the king of the central bank carry more weight than the letter of the U.S. Constitution. The Fed chairman is only formally accountable to Congress. What's more, he is unaccountable to the voters and even to the heads of his own regional banks.
When the Democrats complain, it's because he's not inflating enough (the Fed loves posing as an inflation fighter), while Republicans avoid talking about the issue at all. And, sadly, the conservative movement has nearly dropped the issue. The Mises Institute is almost alone on this one. We don't mind. But isn't it time for Republicans and their intellectual backers to realize, at the least, that silence is not in their political self interest?
Steve Forbes is one of the few men in public life to have addressed the issue. In a series of speeches in the primary season, he decried the arbitrary power that fiat money gives the government and, by implication, the central bank. He called on Congress to institute a gold standard that would make money sound, add some predictability to monetary policy, and restrain the growth of government.
Jack Kemp also once advocated a gold standard. But as soon as he was chosen as the vice presidential candidate, all talk of that came to an end. Perhaps he has begun to realize that a gold standard is incompatible with the big-government and loose money programs ("access to credit") that he also backs.
If, on the other hand, we want to restore economic liberty and limit government, we need to restrict the Fed's ability to manipulate politics, bankroll bailouts, water-down the dollar's value, depress middle-class living standards, and wreck havoc on international markets.
That means the dollar must be redefined in terms of gold, just as it was throughout most of this century and last. With a dollar as good as gold, there would be no reason for the Fed to exist at all. This would be the ideal, of course, but any change to restrain the Fed, put it on a more predictable course, or end its precious secrecy would be a step in the right direction.
Thank goodness, for example, the Fed underwent a partial audit earlier this year, which exposed a previously unknown multi- billion dollar slush fund, a fleet of private jets, and exorbitant salaries. Because of the negative attention, the Fed canceled its plans to buy and develop more prime Washington, D.C., real estate for its overpaid employees.
Of course, Fed corruption is much more significant for the country than its palatial headquarters and subsidized happy hours. In its seventy-three years of existence, it has enacted a social revolution, happily funding every war, every expansion of state power, every redistributionary scheme, and every central planning project. Fed inflation has made us poorer and less free, tossed mothers with young children into the workforce, saddled the country with an unserviceable debt, public and private, and made the welfare state possible, creating a permanent and violent underclass. It is big government's biggest benefactor, and our greatest enemy.
If that's not enough to convince conservatives that it's time to focus on the Fed, consider this: the central bank conspired to reelect Clinton. For that alone, it deserves to be hung out to dry.
Llewellyn H. Rockwell, Jr. is president and founder of the Mises Institute
